Just eight months ago, Greek government 10-year bonds were selling at a 31-per-cent yield. Now the yield is flirting with single digits – 10.5 per cent on Thursday morning. That's a remarkable shift, but it would be more remarkable if the market were less distorted.
Yields are down because the country's fiscal and trade positions look less dire. In 2012, the primary deficit, the fiscal deficit before interest expense, was 1.8 per cent of GDP, down from 3.1 per cent in 2011 and ahead of the government's target. The 2008 current account deficit of 15 per cent of GDP has melted away – the measure could be in balance in 2013.
What's more, unit labour costs are 15 per cent lower than their 2008 peak. Even privatizations, up to now the darkest spot of the reform program, are picking up. Heavyweight investors such as Russia's Gazprom and the Chinese Cosco are eyeing Greek assets. On the financial front, a deal with creditors has lowered debt costs and extended maturities.
Many indicators suggest that Greece is now not that far behind Portugal, whose 10-year bonds yield 5.8 per cent. Equity investors are catching on. The Athens Stock Exchange index is trading around its highest level in 17 months.
Of course, 10-per-cent rates hardly represent a vote of confidence. There are good reasons to worry. GDP is still shrinking, the unemployment rate is painfully high – 57 per cent for young adults – and the debt burden still looks unsustainable.
The bond rally is a bit less than meets the eye. The government isn't selling any new long-term debt on the market, and that traded openly has a face value of only €30-billion ($40-billion), out the sovereign's €312-billion total. In such a thin market, the trend could easily reverse, if investors take fright at rocky Cyprus bailout negotiations or rising political instability in Athens.
In any case, single-digit yields would only be one step on Greece's road to rehabilitation. The final destination, participation in open markets, is still miles away. At least it's a step in the right direction.